The long-awaited tax-code overhaul that President Trump and top congressional Republicans unveiled Wednesday got the predictable reception from Democrats, who denounced the dramatic cuts for businesses and individuals as handouts for the wealthy. And to some extent, they’re right: The framework does propose a prodigious amount of relief for America’s Most Compensated, including ending the estate tax, lowering the top income tax rate and eliminating the alternative minimum tax.
That’s why the fight over Trump’s proposed cuts in individual taxes will be bitter — — especially when you throw in the GOP proposal to end the federal tax deduction for state and local tax levies, which would be particularly costly to taxpayers in California and other blue states.. When it comes to business taxes, though, it would be a mistake for Democrats to line up reflexively against lowering rates, which are the highest in the developed world. Even President Obama thought corporate tax rates were too high; that’s why his administration sought to lower the top corporate rate from 35% to 28% in 2012.
As ever in tax policy, the devil is in the details — most of which the framework leaves for Congress to decide, including the cost of the plan. Still, if done in a deficit-neutral way, an overhaul of corporate taxes that lowers rates while winnowing the thicket of loopholes and exemptions is an idea that lawmakers of both parties should support.
It may be a pipe dream to think of a bipartisan way forward on business taxes. Lawmakers couldn’t reach agreement on a business tax reform package during Obama’s presidency, even with the support of influential members of both parties. These days, the gap between Republicans and Democrats on tax policy is easily as wide as the partisan gap on healthcare.
Yet even Democrats who believe tax rates should go in only one direction — up — ought to recognize the problems caused by the current approach to corporate taxes. The U.S. is badly out of sync with the rest of the planet on which revenues it taxes and how much it charges. Not only is its top rate almost 40% higher than the average charged in other developed nations, it is one of only six countries that still tax the income that domestic companies earn outside their borders.
Such disparities matter in an era when it’s easy for companies to send their headquarters to another country — in fact, they often do so without actually moving their leadership — and even easier to shift a chunk of their revenues to lower-tax havens.
The right approach to corporate tax rates is to eliminate many of the exemptions, credits and deductions that clutter the tax code, raising enough revenue to offset the cost of lowering the top tax rate. Doing so requires the political will to overcome the lobbying onslaught sure to come from companies whose tax breaks are threatened — some of which serve an important public purpose, such as the tax incentives for renewable energy. But the broader payoff is a simpler tax code that’s easier to comply with and enforce, resulting in a system that’s more fair to the taxpayers.
The Trump framework, by contrast, calls for the United States to join the international race to the bottom of the tax charts, slashing corporate rates to 20% — a far deeper cut than could be offset by eliminating corporate tax breaks. With the economy in little need of stimulus, there’s no good reason to bestow such a windfall on corporate America, especially when research shows that the extra profits would flow mainly to shareholders and corporate executives.
Meanwhile, the tax that the U.S. applies to companies when they bring income earned overseas back to the United States is a powerful incentive for them not to use foreign profits to expand here, raise wages here or do anything else that might boost the U.S. economy. Today, U.S. corporations have at least $2 trillion parked idly overseas.
Addressing that problem is tricky because of the risk that companies will shift revenue aggressively to overseas tax havens. But the current system hasn’t stopped that sort of bookkeeping legerdemain either; policymakers clearly need a better, more globally coordinated approach to keeping multinational corporations honest. The Trump framework calls for a minimum tax on overseas earnings to guard against the use of tax havens, and that’s an idea worth considering.
There’s no shortage of bad ideas for business taxes in the framework. For example, the proposal to slash taxes on partnerships and other non-corporate businesses, such as the Trump Organization (just to cite one random example), would only increase the incentive to commit tax fraud. (These non-corporate entities account for 95% of U.S. businesses and a little more than half of U.S. business revenue.) But in seeking to overhaul corporate taxes, it has at least identified a goal that both Republicans and Democrats should embrace.
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